The perils of any risk must be evaluated in terms of options. In considering the possibility of a loss, the property manager must decide whether it is better to:
- avoid risk, by removing the source of risk (for instance, a swimming pool may pose an unacceptable risk if a day care center is located in the building),
- control risk, by preparing for an emergency before it happens (e.g., by installing sprinklers, fire doors, and security systems),
- transfer risk, by shifting the risk onto another party (that is, by taking out an insurance policy), or
- retain risk, by deciding that the chances of the event occurring are too small to justify the expense of any other response (an alternative might be to take out an insurance policy with a large deductible, which is usually considerably less expensive).
Security of Tenants
The physical safety of tenants of the leased premises is an important issue for property managers and owners. Recent court decisions in several parts of the country have held owners and their agents responsible for physical harm that was inflicted on tenants by intruders. These decisions have prompted property managers and owners to think about how to protect tenants and secure apartments from intruders.
Types of Insurance
Insurance is one way to protect against losses. Many types of insurance are available. An insurance audit should be performed by a competent, reliable insurance agent who is familiar with insurance issues for the type of property involved. The audit will indicate areas in which greater or lesser coverage is recommended and will highlight particular risks.
Some common types of coverage available to income property owners and managers include the following:
- Fire and hazard: Fire insurance policies provide coverage against direct loss or damage to property from a fire on the premises. Standard fire coverage can be extended to include other hazards such as windstorm, hail, smoke damage, or civil insurrection.
- Consequential loss, use, and occupancy: Consequential loss insurance covers the results, or consequences, of a disaster. Consequential loss can include the loss of rent or revenue to a business that occurs if the business’s property cannot be used.
- Contents and personal property: This type of insurance covers building contents and personal property during periods when they are not actually located on the business premises.
- Liability: Public liability insurance covers the risks an owner assumes whenever the public enters the building. A claim paid under this coverage is used for medical expenses by a person who is injured in the building as a result of the owner’s negligence. Claims for those hurt in the course of their employment are covered by state laws known as workers’ compensation acts. (A building owner who is an employer must obtain a workers’ compensation policy from a private insurance company.)
- Casualty: Casualty insurance policies include coverage against theft, burglary, vandalism, and machinery damage as well as health and accident insurance. Casualty policies are usually written on specific risks, such as theft, rather than being all-inclusive.
- Surety bonds: Surety bonds cover an owner against financial losses resulting from an employee’s criminal acts or negligence while performing assigned duties.
Many insurance companies offer multi-peril policies for apartment and commercial buildings. Such a policy offers the property manager a “package” of standard commercial coverages, such as fire, hazard, public liability, and casualty. Special coverage for earthquakes and floods is also available.
Insurance for the personal property of tenants is also available to tenants. Many tenants do not realize that if a property burns, their personal property is usually not covered by the landlord’s policy. (In Illinois, the policy type tenants should ask for is HO-4, designed specifically to cover renters’ personal property.)
Claims
Two possible methods can be used to determine the amount of a claim under an insurance policy. One is the depreciated, or actual, cash value of the damaged property. That is, the property is not insured for what it would cost to replace it but rather for what it was originally worth, less the depreciation in value that results from use and the passage of time. The other method is current replacement cost. In this sort of policy, the building or property is insured for what it would cost to rebuild or replace it today.
As with homeowners’ policies, commercial policies include coinsurance clauses that require the insured to carry fire coverage, usually in an amount equal to 80 percent of a building’s replacement value. If the coinsured amount is met on a policy guaranteeing replacement cost, it may mean that if a property is destroyed, the insured can collect more than the stated appraised value on the property.
